Market players were looking to play a reaction to the European Central Bank announcement of a quantitative easing program, but the news was a muddled mess and the market bounced around rather randomly. Initially the comments by ECB President Mario Draghi were vague, but later in the day there was talk that a QE "package" would be announced in January. The market has heard those stories before and it faded again as the day wound down.
Overall, it was a rather meaningless day although it did have a slight negative bias. Breadth was approaching two to one negative and the momentum action was quite narrow again. The indices barely budged and many traders were groaning about the intraday bounce when they were mentally preparing for some weakness.
Many observers fail to realize that the fact that the market hasn't had any notable downside for a very long time is a negative for active traders. It is the ups and downs that help to create a constant source of new opportunities. When we never have any real downside it is impossible for a new crop of entry points to develop. If you are just sitting and riding the wave this sort of steady trend is very nice, but if you prefer action then it can be downright tiresome.
Don't forget we have the November jobs report in the morning. While I'm not sure it matters all that much at this point, it does give us some news to react to.
Have a good evening. I'll see you in the morning.
Dec. 04, 2014 | 1:15 PM EST
The Market Bounces Back
- Market players simply won't give up on this market.
Apparently, the European Central Bank didn't like the response to their vague discussion of a QE program, so they issued a statement that a program would roll out in January. That, of course, bounced the market, but we probably would have found an excuse for a recovery even without the ECB's silliness.
Market players simply don't want to give up on this market. They buy dips over and over because it works. It is greatly annoying to many traders because it feels so artificial and false, but that has always been the case: Traders continue to do what works until they start losing money. Usually, patterns don't work this consistently for this long, but in this case the dip-buying has become even more automatic.
The bad news is that patterns like this always end, and when they have been as consistent as this one, it is going to trap a lot of people when the routine changes. There is no question that the bulls are lulled into a very high level of complacency, but trying to time when the ramifications of that might be felt is impossible.
Breadth is still running negative and the pockets of momentum are sparse, but buyers are still hunting for entries. Performance anxiety is at tremendous levels with just a few weeks left in a year that has been especially cruel to money managers.
Stick with managing your positions and let the "pros" make the big market calls. When conditions change, we'll know it.
Dec. 04, 2014 | 10:26 AM EST
No Fear of Sustained Downside
- The smart move is to stick with the positive tone.
European Central Bank President Mario Draghi has given the bears a little ammunition with his dithering over a European quantitative easing program, but the underlying support of this market is preventing any real pressure so far.
Traders are so used to immediately dip buying that they really have no fear that downside will be sustained. If we have some lower lows later in the day that may cause a little concern, but so far there is no big selling push.
While support is still quite solid it makes for very lifeless trading. There just isn't much movement out there. Breadth is running about 2 to 3 negative but momentum names are about. Biotechnology and oil are the laggards but no sector is moving much.
Some names on my trading screen include Taser International (TASR), China Finance Online (JRJC), Exact Sciences (EXAS) and Avago Technologies (AVGO), but the pockets of action are extremely narrow.
The temptation is to try to force something or to make flamboyant predictions. The smart move, however, is to stick with the positive tone and not try to guess when conditions will change. The bulls are convinced that seasonality will carry them for the rest of the month and they may be right.
Dec. 04, 2014 | 7:01 AM EST
It's Too Early for Contrarians
- If you think a top is near, you're wasting your time.
"Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments."
One of the more common approaches to market timing is contrary strategy. The theory is that when bullishness is at extremely high levels, there is little buying power left to drive the market higher and that produces a top. As Plato states, excess usually leads to a change in the opposite direction.
While it may sound like a very logical theory, it is extremely difficult to actually employ. Simply measuring sentiment is tough enough, but then going a step further and determining the extent to which market players have acted on their conviction levels is even tougher.
In recent years, contrary thinking has been a complete bust for its practitioners. The bears who attempt to use it have been consistently squeezed although they have no trouble finding examples of excess bullishness. Indeed, the indices themselves smack of excess.
There are a number of reasons for the failure of contrary strategy, but the primary one is that the supply of buying power is never used up, since the central banks keep producing new sources of cheap capital. While it may seem that the thinking is extreme, it doesn't much matter if there is still idle capital to invest. This morning we will find out if the ECB is going to give us another big dose of cheap funds.
Another thing that has made contrary strategy so difficult is that market players just don't embrace this market like they did in the days prior to the Great Recession. Virtually every rally during the last few years has been characterized as "hated". Money managers are in a constant state of despair, because they never seem to catch up with the indices that no longer ebb and flow in a natural manner.
The rising market in the current environment doesn't produce the extreme bullish sentiment that the contrarians keep seeking out. Instead, the steady rise produces a huge wall of worry, as market players worry about keeping pace with the indices. They slowly and reluctantly keep buying, not because of bullish conviction but because of fear of being left behind.
It is hard not to worry a bit when the folks in the media seem so sure that the market trend is not going to end soon. In the past, this attitude has been a good indicator that trouble is lurking, but what we have to understand is that the crowd is right the vast majority of the time and it is only at the very extremes that they serve as good contrary indicators.
Some might say the optimism in the media is extreme. But when you talk with the people who have money on the line and are trading these markets every day, the overwhelming sentiment is that they are tired of this one-way action and would prefer to see some pullbacks. In other words, contrary thinking supports the view of more upside rather than a top.
We have some big news about the prospects of a quantitative easing program in Europe coming up from the ECB before the open. That is going to set the tone this morning, but even if the program is delayed or less aggressive than anticipated, the underlying support in this market will likely prevent any selling from lasting for long.
It is unquestionable that the uptrend is strong. You are wasting your time if you think that sentiment is so bullish that a top is about to occur.
I'll be back with some comments after the ECB news.